The central policy issue facing the Review can be simply stated: what extent of global mitigation, with Australia playing its proportionate part, provides the greatest excess of gains from reduced risks of climate change over costs of mitigation?

The mitigation costs are experienced through conventional economic processes and can be measured through formal economic modelling.

Only some of the benefits of mitigation are experienced through conventional market processes (types 1 and 2) and only one is amenable to modelling (Type 1). Others take the form of insurance against severe and potentially catastrophic outcomes (Type 3), and still others the avoidance of environmental and social costs, which are not amenable to conventional measurement (Type 4).

The challenge is to make sure that important, immeasurable effects are brought to account.

The long time frames involved create a special challenge, requiring us to measure how we value the welfare of future generations relative to our own.

Chapter 2 Understanding climate science

The Review takes as its starting point, on the balance of probabilities and not as a matter of belief, the majority opinion of the Australian and international scientific communities that human activities resulted in substantial global warming from the mid-20th century, and that continued growth in greenhouse gas concentrations caused by human-induced emissions would generate high risks of dangerous climate change.

A natural carbon cycle converts the sun’s energy and atmospheric carbon into organic matter through plants and algae, and stores it in the earth’s crust and oceans. Stabilisation of carbon dioxide concentrations in the atmosphere requires the rate of greenhouse gas emissions to fall to the rate of natural sequestration.

There are many uncertainties around the mean expectations from the science, with the possibility of outcomes that are either more benign—or catastrophic.

Chapter 3 Emissions in the Platinum Age

Greenhouse gas emissions have grown rapidly in the early 21st century. In the absence of effective mitigation, strong growth is expected to continue for the next two decades and at only somewhat moderated rates beyond.

So far, the biggest deviations from earlier expectations are in China. Economic growth, the energy intensity of that growth, and the emissions intensity of energy use are all above projections embodied in earlier expectations. China has recently overtaken the United States as the world’s largest emitter and, in an unmitigated future, would account for about 35 per cent of global emissions in 2030.

Other developing countries are also becoming major contributors to global emissions growth, and will take over from China as the main growing sources a few decades from now. Without mitigation, developing countries would account for about 90 per cent of emissions growth over the next two decades, and beyond.

High petroleum prices will not necessarily slow emissions growth for many decades because of the ample availability of large resources of high-emissions fossil fuel alternatives, notably coal.

Chapter 4 Projecting global climate change

As a result of past actions, the world is already committed to a level of warming that could lead to damaging climate change.

Extreme climate responses are not always considered in the assessment of climate change impacts due to the high level of uncertainty and a lack of understanding of how they work. However, the potentially catastrophic consequences of such events mean it is important that current knowledge about such outcomes is incorporated into the decision-making process.

Continued high emissions growth with no mitigation action carries high risks. Strong global mitigation would reduce the risks considerably, but some systems may still suffer critical damage.

There are advantages in aiming for an ambitious global mitigation target in order to avoid some of the high-consequence impacts of climate change.

Chapter 5 Projecting Australian climate change

Australia’s dry and variable climate has been a challenge for the continent’s inhabitants since human settlement.

Temperatures in Australia rose slightly more than the global average in the second half of the 20th century. Streamflow has fallen significantly in the water catchment areas of the southern regions of Australia. Some of these changes are attributed by the mainstream science to human-induced global warming.

Effects of future warming on rainfall patterns are difficult to predict because of interactions with complex regional climate systems. Best-estimate projections show considerable drying in southern Australia, with risk of much greater drying. The mainstream Australian science estimates that there may be a 10 per cent chance of a small increase in average rainfall, accompanied by much higher temperatures and greater variability in weather patterns.

Chapter 6 Climate change impacts on Australia

The Review has conducted detailed studies of impacts of climate change on Australia. These studies are available in full on the Review’s website.

Growth in emissions is expected to have a severe and costly impact on agriculture, infrastructure, biodiversity and ecosystems in Australia.

There will also be flow-on effects from the adverse impact of climate change on Australia’s neighbours in the Pacific and Asia.

These impacts would be significantly reduced with ambitious global mitigation.

The hot and dry ends of the probability distributions, with a 10 per cent chance of realisation, would be profoundly disruptive.

Chapter 7 Australia’s emissions in a global context

Australia’s per capita emissions are the highest in the OECD and among the highest in the world. Emissions from the energy sector would be the main component of an expected quadrupling of emissions by 2100 without mitigation.

Australia’s energy sector emissions grew rapidly between 1990 and 2005. Total emissions growth was moderated, and kept more or less within our Kyoto Protocol target, by a one-off reduction in land clearing.

Relative to other OECD countries, Australia’s high emissions are mainly the result of the high emissions intensity of energy use, rather than the high energy intensity of the economy or exceptionally high per capita income. Transport emissions are not dissimilar to those of other developed countries. Australia’s per capita agricultural emissions are among the highest in the world, especially because of the large numbers of sheep and cattle.

The high emissions intensity of energy use in Australia is mainly the result of our reliance on coal for electricity. The difference between Australia and other countries is a recent phenomenon: the average emissions intensity of primary energy supply for Australia and the OECD was similar in 1971.

Chapter 8 Assessing the international response

Climate change is a global problem that requires a global solution.

Mitigation effort is increasing around the world, but too slowly to avoid high risks of dangerous climate change. The recent and projected growth in emissions means that effective mitigation by all major economies will need to be stronger and earlier than previously considered necessary.

The existing international framework is inadequate, but a better architecture will only come from building on, rather than overturning, established efforts.

Domestic, bilateral and regional efforts can all help to accelerate progress towards an effective international agreement.

The United Nations meeting in Copenhagen in December 2009 is an important focal point in the attempt to find a basis for global agreement. Australia must be prepared to play its full proportionate part as a developed country.

Chapter 9 Towards global agreement

Only a comprehensive international agreement can provide the wide country coverage and motivate the coordinated deep action that effective abatement requires.

The only realistic chance of achieving the depth, speed and breadth of action now required from all major emitters is allocation of internationally tradable emissions rights across countries. For practical reasons, allocations across countries will need to move gradually towards a population basis.

An initial agreement on a global emissions path towards stabilisation of the concentration of greenhouse gases at 550 CO2-e is feasible. 450 CO2-e is a desirable next step. Agreement on, and the beginnings of implementation of, such an agreement, would build confidence for the achievement of more ambitious stabilisation objectives.

All developed and high-income countries, and China, need to be subject to binding emissions limits from the beginning of the new commitment period in 2013.

Other developing countries—but not the least developed—should be required to accept one-sided targets below business as usual.

Chapter 10 Deepening global collaboration

International trade in permits lowers the global cost of abatement, and provides incentives for developing countries to accept commitments.

Trade in emissions rights is greatly to be preferred to trade in offset credits, which should be restricted.

A global agreement on minimum commitments to investment in low-emissions new technologies is required to ensure an adequate level of funding of research, development and commercialisation. Australia’s commitment to support of research, development and commercialisation of low-emissions technology would be about $2.8 billion.

An International Adaptation Assistance Commitment would provide new adaptation assistance to developing countries that join the mitigation effort.

Early sectoral agreements would seek to ensure that the main trade-exposed, emissions-intensive industries face comparable carbon prices across the world, including metals and international civil aviation and shipping.

A WTO agreement is required to support international mitigation agreements and to establish rules for trade measures against countries thought to be doing too little on mitigation.

Chapter 11 Costing climate change and its avoidance

Type 1 (modelled median outcomes) plus Type 2 (estimates of other median outcomes) costs of climate change in the 21st century are much higher than earlier studies suggested. The Platinum Age emissions grow much faster than earlier studies contemplated.

The modelling of the 550 mitigation case shows mitigation cutting the growth rate over the next half century, and lifting it somewhat in the last decades of the century.

GNP is higher with 550 mitigation than without by the end of the century. The loss of present value of median climate change GNP through the century will be outweighed by Type 3 (insurance value) and Type 4 (non-market values) benefits this century, and much larger benefits of all kinds in later years.

Mitigation for 450 costs almost a percentage point more than 550 mitigation of the present value of GNP through the 21st century. The stronger mitigation is justified by Type 3 (insurance value) and Type 4 (non-market values) benefits in the 21st century and much larger benefits beyond. In this context, the costs of action are less than the costs of inaction.

Chapter 12 Targets and trajectories

Australia should indicate at an early date its preparedness to play its full, proportionate part in an effective global agreement that ‘adds up’ to either a 450 or a 550 emissions concentrations scenario, or to a corresponding point between.

Australia’s full part for 2020 in a 450 scenario would be a reduction of 25 per cent in emissions entitlements from 2000 levels, or one-third from Kyoto compliance levels over 2008–12, or 40 per cent per capita from 2000 levels. For 2050, reductions would be 90 per cent from 2000 levels (95 per cent per capita).

Australia’s full part for 2020 in a 550 scenario would be a reduction in entitlements of 10 per cent from 2000 levels, or 17 per cent from Kyoto compliance levels over 2008–12, or 30 per cent per capita from 2000. For 2050, reductions would be 80 per cent from 2000 levels or 90 per cent per capita.

If there is no comprehensive global agreement at Copenhagen in 2009, Australia, in the context of an agreement among developed countries only, should commit to reduce its emissions by 5 per cent (25 per cent per capita) from 2000 levels by 2020, or 13 per cent from the Kyoto compliance 2008–12 period.

Chapter 13 An Australian policy framework

Australia’s mitigation effort is our contribution to keeping alive the possibility of an effective global agreement on mitigation.

Any effort prior to an effective, comprehensive global agreement should be short, transitional and directed at achievement of a global agreement.

A well-designed emissions trading scheme has important advantages over other forms of policy intervention. However, a carbon tax would be better than a heavily compromised emissions trading scheme.

The role of complementary measures to the emissions trading scheme is to lower the cost of meeting emissions reduction trajectories, as well as adapting to the impacts of climate change by correcting market failures.

Once a fully operational emissions trading scheme is in place, the Mandatory Renewable Energy Target will not address any additional market failures. Its potentially distorting effects can be phased out.

Governments at all levels will inform the community’s adaptation response. More direct forms of intervention may be warranted when events unfold suddenly or when communities lack sufficient options or capacity for dealing with the impacts of climate change.

Chapter 14 An Australian emissions trading scheme

A principled approach to the design of the Australian emissions trading scheme is essential if the scheme is to avoid imposing unnecessary costs on Australians.

The integrity, efficiency and effectiveness of the scheme will require:

establishment of an independent carbon bank with all the necessary powers to oversee the long-term stability of the scheme

implementation of a transition period from 2010 to the conclusion of the Kyoto period (end 2012) involving fixed price permits

credits to trade-exposed, emissions-intensive industries to address the failure of our trading partners to adopt similar policies

no permits to be freely allocated

no ceilings or floors on the price of permits (beyond the transition period)

intertemporal use of permits with ‘hoarding’ and ‘lending’ from 2013

a judicious and calibrated approach to linking with international schemes

scheme coverage that is as broad as possible, within practical constraints

Seemingly small compromises will quickly erode the benefits that a well-designed emissions trading scheme can provide.

The existing, non-indexed shortfall penalty in the Mandatory Renewable Energy Target needs to remain unchanged in the expanded scheme.

Chapter 15 Adaptation and mitigation measures for Australia

Every Australian will have to adapt to climate change within a few decades. Households and businesses will take the primary responsibility for the maintenance of their livelihoods and the things that they value.

Information about climate change and its likely impacts is the first requirement of good adaptation and mitigation policies. This requires strengthening of the climate-related research effort in Australia. The Australian Climate Change Science Program should be provided with the financial resources to succeed as a world-class contributor to the global climate science effort from the southern hemisphere.

A new Australian climate change policy research institute should be established to raise the quality of policy-related research.

Flexible markets using the best available information are the second essential component for successful adaptation and mitigation policies. It will be important to strengthen markets for insurance, water and food.

Government regulatory intervention and provision of services will be required in relation to emergency management services and preservation of ecosystems and biodiversity.

Chapter 16 Sharing the burden in Australia

Low-income households spend much higher proportions of their incomes than other households on emissions-intensive products. The effects of the emissions trading scheme will fall heavily on low-income households, so the credibility, stability and efficiency of the scheme require the correction of these regressive effects by other measures.

At least half the proceeds from the sale of all permits could be allocated to households, focusing on the bottom half of the income distribution. The bulk could be passed through the tax and social security systems, with energy efficiency commitments to low-income households in the early years.

To assist in early adjustment of low-income households, a system of ‘green credits’ should be introduced to help with funding of investments in energy efficiency in housing, household appliances and transport.

It is possible but not certain that regional employment issues could arise in coal regions. They would not emerge in the early years of an emissions trading scheme. Up to $1 billion in total should be made available for matched funding for investment in reducing emissions in coal power generation, as a form of preemptive structural adjustment assistance.

Chapter 17 Information barriers to known technologies

There are potentially large and early gains from better utilisation of known technologies, goods and services, including energy efficiency and low-emissions transport options.

Externalities in the provision of information and principal–agent issues inhibit the use of distributed generation and energy-saving opportunities in appliances, buildings and vehicles.

A combination of information, regulation and restructuring of contractual relationships can reduce the costs flowing from many of the market failures blocking optimal utilisation of proven technologies and practices.

Chapter 18 The innovation challenge

Basic research and development of low-emissions technologies is an international public good, requiring high levels of expenditure by developed countries.

Australia should make a proportionate contribution alongside other developed countries in its areas of national interest and comparative research advantage. This would require a large increase in Australian commitments to research, development and commercialisation of low-emissions technologies, to more than $3 billion per annum by 2013.

A new research council should be charged with elevating, coordinating and targeting Australia’s effort in low-emissions research.

There are externalities associated with private investment in commercialising new, low-emissions technologies.

To achieve an effective commercialisation effort on a sufficiently early time scale, an Australian system of matching funding should be available automatically where there are externalities associated with private enterprise investment in low emissions innovation.

Research in adaptation technologies is required. Existing arrangements are well placed to meet immediate priorities.

Chapter 19 Network infrastructure

There is a risk that network infrastructure market failures relating to electricity grids, carbon dioxide transport systems, passenger and freight transport systems, water delivery systems and urban planning could increase the costs of adjustment to climate change and mitigation.

The proposed national electricity transmission planner’s role should be expanded to include a long-term economic approach to transmission planning and funding. The Building Australia Fund should be extended to cover energy infrastructure. A similarly planned approach is necessary to facilitate timely deployment of large-scale carbon capture and storage.

There is a limited case for carefully calculated rates for feed-in tariffs for household electricity generation and co-generation.

The need to reduce the costs of mitigation reinforces other and stronger reasons for giving higher priority to increasing capacity and improving services in public transport, and for planning for greater urban density.

Chapter 20 Transforming energy

Australians have become accustomed to low and stable energy prices. This is being challenged by rapidly rising capital costs and large price increases for natural gas and black coal. These cost effects will be joined by pressures from rising carbon prices, and will be larger than the impact of the emissions trading scheme for some years.

Australia is exceptionally well endowed with energy options, across the range of fossil fuel and low-emissions technologies.

The interaction of the emissions trading scheme with support for research, development and commercialisation and for network infrastructure will lead to successful transition to a near-zero emissions energy sector by mid-century.

The future for coal-based electricity generation, for coal exports and for mitigation in developing Asia depends on carbon capture and storage becoming commercially effective. Australia should lead a major international effort towards the testing and deployment of this technology.

Chapter 21 Transforming transport

Transport systems in Australia will change dramatically this century, independently of climate change mitigation. High oil prices and population growth will change technologies, urban forms and roles of different modes of transport.

An emissions trading scheme will guide this transformation to lower-emissions transport options.

Higher oil prices and a rising emissions price will change vehicle technologies and fuels. The prospects for low-emissions vehicles are promising. It is likely that zero-emissions road vehicles will become economically attractive and be the most important source of decarbonisation from the transport sector.

Governments have a major role to play in lowering the economic costs of adjustment to higher oil prices, an emissions price and population growth, through planning for more compact urban forms and rail and public transport. Mode shift may account for a quarter of emissions reductions in urban passenger transport, lowering the cost of transition and delivering multiple benefits to the community.

Chapter 22 Transforming rural land use

Rural Australia faces pressures for structural change from both climate change and its mitigation.

Effective mitigation would greatly improve the prospects for Australian agriculture, at a time when international demand growth in the Platinum Age is expanding opportunities.

Choices for landowners will include production of conventional commodities, soil carbon, bioenergy, second-generation biofuels, wood or carbon plantations, and conservation forests.

There is considerable potential for biosequestration in rural Australia. The realisation of this potential requires comprehensive emissions accounting.

The realisation of a substantial part of the biosequestration potential of rural Australia would greatly reduce the costs of mitigation in Australia. It would favourably transform the economic prospects of large parts of remote rural Australia.

Full utilisation of biosequestration could play a significant role in the global mitigation effort. This is an area where Australia has much to contribute to the international system.

Chapter 23 Towards a low-emissions economy

Australian material living standards are likely to grow strongly through the 21st century, with or without mitigation, and whether 450 or 550 ppm is the mitigation goal. Botched domestic and international mitigation policies are a risk.

Substantial decarbonisation by 2050 to meet either the 450 or 550 obligation is feasible. It will go fastest in the electricity sector, then transport, with agriculture being difficult unless, as is possible, there are transformative developments in biosequestration.

There is considerable technological upside. This could leave Australian energy costs relatively low, so that it remains a competitive location for metals processing.

Australia’s human resource strengths in engineering, finance and management related to the resources sector are important assets in the transition to a low-emissions economy. They will need to be nurtured by high levels of well-focused investment in education and training.

The introductory impact of the Australian emissions trading scheme will not be inflationary if permit revenue is used judiciously to compensate households.

Chapter 24 Fateful decisions

There are times in the history of humanity when fateful decisions are made. The decision this year and next on whether to enter a comprehensive global agreement for strong action is one of them.

Australia’s actions will make a difference to the outcome, in several ways.

The chances of success at Copenhagen would be greater if heads of government favouring a strong outcome set up an experts group to come up with a practical approach to global mitigation that adds up to various environmental objectives.

On a balance of probabilities, the failure of our generation on climate change mitigation would lead to consequences that would haunt humanity until the end of time.